Canadian Economy Edges Closer to Recession with Housing Market Stagnation

Recent Statistics Canada reports suggest that the Canadian economy is on the brink of a recession. With the Q2 2023 GDP data revealing a halt, this becomes more alarming when paired with the ongoing population surge. What's particularly concerning is that even with the influx of people, household expenditure, especially in the housing sector, is dwindling.

A Pause in Canada’s Economic Growth

The economic pulse of Canada is gradually decelerating. Although it hasn’t dipped, the seasonally adjusted GDP for Q2 2023 remained essentially unchanged, contrasting the 0.6% uptick from the prior quarter. Year-on-year, the economy has only expanded by 1.1%, lagging behind its population growth.

This slowdown seems even more problematic when examining its root cause: the household sector's underperformance.

From Housing Boost to Housing Burden on GDP

In the past, the Canadian housing sector was a key player in elevating GDP. But now, it has turned into one of its main detractors. The Q2 2023 data showed a decline in housing investments by 2.1%, which denotes the fifth consecutive quarterly decrease. This decline is primarily attributed to the dwindling construction of new houses, which saw a reduction of 8.2%, with only Nova Scotia reporting growth. The economy also witnessed a reduction in refurbishment spending, which was reduced by 4.3%. Data provided by Statistics Canada.

After witnessing one of the most substantial housing booms, it's somewhat anticipated to encounter a housing deceleration. However, the broader concern is that this mirrors a more expansive pattern of weaker household performance.

Canadian Households: Signs of Economic Stress

There's a visible decline in real household spending, which decreased by 0.1% after marginal increases in the previous quarter. This reduction is influenced by decreased expenditures on new passenger vehicles (-9.5%), furniture (-3.3%), outdoor leisure (-8.3%), and natural gas (-6.4%). A marginal upsurge in goods spending (+0.1%) did little to alleviate this downturn.

While a minor setback after a boom phase might be considered normal, one cannot ignore the implications of the current population surge. In general terms, with GDP evaluated in aggregate, an increase in population should ideally amplify the nation's output. Especially when considering Canada's unprecedented population growth, the contribution to the economy should be palpable.

However, the reality paints a different picture. Even with significant population growth, the economy is dwindling. This growth, when looked into deeply, merely cushions the severity of household conditions. When the household spending is adjusted per person, there's a 0.7% reduction in Q2, making it the third quarter in the last year to witness such a contraction. This trend exemplifies the concept of diminishing returns.

Though Canada may not officially be in a recession now, many households might already feel ensnared in its clutches.